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                                December 4, 2000


CONFIDENTIAL

John Hnanicek
eToys Inc.
12200 West Olympic Boulevard
Los Angeles, California  90064

         Re: RETENTION COMPENSATION

Dear John:

         The Board of Directors of eToys Inc. (including any successor or
assignee thereof, the "Company") has authorized the Company to obtain
indications of interest for a possible purchase of the Company by a third party.
While the Board has not at this time determined to sell the Company, the Board
today approved the engagement of an investment bank to act as the Company's
advisor in connection with any proposed sale transaction. The Board has
determined that, in light of prevailing market conditions, depending upon the
achievable valuation in a sale transaction, such a sale may be in the best
interests of the Company and its securityholders.

         The Board recognizes that these actions will create uncertainty for you
regarding your future employment. Moreover, as a key employee, your
participation in the Company's continuing operations during this process as well
as your contributions to the process itself will be necessary to enable the
Company to successfully consummate any proposed sale. Accordingly, the Company
desires to retain your services during this process and, in order to do so, has
been authorized by the Board to offer you the following benefit.

         Promptly following your execution of this letter agreement, the Company
will pay to you in cash a lump sum of Two Hundred Fifty Thousand Dollars
($250,000) (the "Retention Compensation"), less applicable withholdings. The net
payment received by you following deduction of applicable withholdings is
referred to herein as the "Net Retention Compensation."

         Your Retention Compensation will be deemed fully vested on the earliest
to occur of the following (the "Vesting Date"): (a) March 31, 2001, (b) the
consummation of a Change of Control of the Company, (c) the Company's
termination of your employment without Cause, or (d) your termination of your
employment for Good Reason. The definitions of the terms "Change of Control",
"Cause" and "Good Reason" are set forth on Exhibit A hereto. Once your

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Retention Compensation Letter
December 4, 2000
Page 2


Retention Compensation has vested, you will not be required to return it or
reimburse the Company for it under any circumstances whatsoever.

         In the event that, prior to the Vesting Date, either (i) you
voluntarily terminate your employment with the Company without Good Reason or
(ii) the Company terminates your employment for Cause, then, within 30 days
following such termination, you will be required to reimburse the Company an
amount equal to your Net Retention Compensation, without interest or other
penalty. You will not be required to reimburse the Company for any amount
greater than the Net Retention Compensation.

         Nothing contained in this letter agreement alters any of the other
terms of your employment. Thus, the Retention Compensation is in addition to
your current salary, stock options, employee benefits and/or other compensation,
all of which will continue to be provided by the Company in accordance with past
practice. Further, you will remain an "at-will" employee of the Company.
Accordingly, the Company will be free to terminate your employment at any time,
and you will be free to terminate your employment with the Company at any time.

         This letter agreement is governed by the laws of the State of
California. It may not be amended or modified except through a written amendment
signed by the Company and you.

         If this letter agreement is acceptable to you, please so indicate by
countersigning it in the place provided below, whereupon it will become a
binding agreement between the Company and you. Thank you for your continuing
efforts and contributions during this process.

                                       Sincerely,

                                       ETOYS INC.


                                       By: /s/ Edward C. Lenk
                                          -------------------
                                          Edward C. Lenk
                                          Chairman of the Board of Directors,
                                          Chief Executive Officer and President


         Accepted and agreed to on December 4, 2000.


         By: /s/ John Hnanicek
            ------------------
            John Hnanicek


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Retention Compensation Letter
December 4, 2000
Page 3


                                    EXHIBIT A

         As used in this letter agreement, the following terms have the
following meanings:

I.       "Cause" means (a) a willful and deliberate refusal to follow lawful
         directives of the Company's Chief Executive Officer or Board of
         Directors which are consistent with your customary duties and
         responsibilities, where such refusal has continued for more than 15
         days following written notice of such refusal; (b) embezzlement or
         misappropriation of funds or property of the Company; or (c) conviction
         of a felony involving moral turpitude.

II.      "Change of Control" shall mean the occurrence of any of the following:

                  (A) Any "Person" or "Group" (as such terms are defined in
         Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange
         Act") and the rules and regulations promulgated thereunder) is or
         becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under
         the Exchange Act), directly or indirectly, of securities of the
         Company, or of any entity resulting from a merger or consolidation
         involving the Company, representing more than fifty percent (50%) of
         the combined voting power of the then outstanding securities of the
         Company or such entity.

                  (B) The consummation of (x) a merger, consolidation,
         reorganization or comparable transaction to which the Company is a
         party, whether or not the Company is the Person surviving or resulting
         therefrom, or (y) a sale, assignment, lease, conveyance or other
         disposition of all or substantially all of the assets of the Company,
         in one transaction or a series of related transactions, to any Person
         other than the Company, where any such transaction or series of related
         transactions referred to in the preceding clause (x) or (y) (a
         "Transaction") does not otherwise result in a "Change of Control"
         pursuant to subparagraph (A) of this definition; PROVIDED, HOWEVER,
         that no such Transaction shall constitute a "Change of Control" under
         this subparagraph (B) if the Persons who were the stockholders of the
         Company immediately before the consummation of such Transaction are the
         Beneficial Owners, immediately following the consummation of such
         Transaction, of fifty percent (50%) or more of the combined voting
         power of the then outstanding voting securities of the Person surviving
         or resulting from any merger, consolidation or reorganization referred
         to in clause (x) above in this subparagraph (B) or the Person to whom
         the assets of the Company are sold, assigned, leased, conveyed or
         disposed of in any transaction or series of related transactions
         referred in clause (y) above in this subparagraph (B).

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Retention Compensation Letter
December 4, 2000
Page 4



III.     "Good Reason" means (a) any adverse change in your job title or the
         assignment to you of duties materially inconsistent with your position
         with the Company; (b) a reduction in your current salary; (c) any
         failure by the Company to continue to pay your current salary in
         accordance with past practice or to provide employee benefits
         reasonably comparable to those currently provided to you; (d) the
         relocation of your office to a location that is more than 50 miles from
         its current location; (e) the Company's failure to maintain Directors
         and Officers Insurance reasonably comparable to its existing policy;
         (f) any effort by the Company to rescind or recover from you the
         Retention Compensation provided by this letter agreement; (g) any
         disability suffered by you that prevents you from performing your
         duties generally in accordance with past practice; or (h) your death.